Money printing has “limited influence” on growth and more radical measures are
needed to stimulate the economy, the newest member of the Bank of England’s
rate-setting committee has warned.

Ian McCafferty, who joined the Monetary Policy Committee in September, said quantitative easing is no longer as effective as it was, and that any increase to the current £375bn stimulus programme should be “carefully” considered because the policy is “not costless” and may have “inflationary consequences”.

Instead, he suggested that new policies should target specific problems in the economy, in the same way as Funding for Lending was set up to address the shortage of cheap credit.

“We need to be open to considering other unorthodox means to conduct monetary policy if they become necessary,” Mr McCafferty told Bloomberg.

“If [the coming year] is not starting to improve as we expect, then I think we would need to consider what are the very specific problems that still exist in the economy and to what extent can very targeted monetary policy measures deal with very specific problems.”

However, he was largely dismissive of proposals to change the Bank’s inflation target to a nominal GDP mandate – a proposal first raised by incoming Governor Mark Carney.

“It’s of use in very unusual circumstances,” Mr McCafferty said. “I don’t think nominal GDP targeting is a better signal than other methods, and I think there are distinct problems with it, certainly in terms of measurement, because as we know GDP is heavily revised even in the relatively short term, so it is perhaps less precise.”

He added the Bank’s current mandate is “relatively flexible”.

Mr McCafferty, who was formerly chief economist at the CBI business lobby group, also raised concerns about high inflation. “There are reasons to think that inflation may come back to the [2pc] target only slowly over the next two years,” he said. Inflation is currently 2.7pc.

In an upbeat assessment for cash-strapped households, he added that there was “a risk that, as the economy recovers, companies will feel obliged to reward their staff and compensate them for the recent squeeze in living standards with more generous pay increases”. Such pay deals would push up inflation.

“What we can conclude is that the longer inflation remains elevated, and hence the greater the cumulative squeeze on real incomes, the greater the risk of such generosity,” he added.

He also argued that one explanation for why employers have retained unproductive workers rather than laid them off might be because they do not want to lose “firm-specific skills”.

“Even when faced with weak demand, firms are reluctant to lose experienced workers, as they are hard to replace, and their firm-specific skills take time to replicate. In that sense, the workforce is becoming less fungible,” he said.

He added that he welcomed the Funding for Lending Scheme, which “is generating some traction, particularly in the mortgage market, where it is more likely that there is pent-up demand”.